Gold: Looking Backwards and Forward

December 31, 2008 Inflation, Physical Gold, Predictions No Comments

I thought that on this New Year’s Eve we should take a sampling of what the feelings are about the past year’s action, gold, the economy and the future. First let’s take a look at what markets are up to on this New Year’s Eve morning. The DOW is up 22 at 8,690, the NAS up 8 at 1,559 and gold is down $16.50 at $857.10. The numbers mean little today because of the lack of volume. On the other hand, any chance to diminish gold’s appeal as a safe haven investment adds more time to the dollars viability. Gold is such a relatively small market that it is easy to manipulate and much more so on low volume days.

OK, let’s pop around and see what everyone is thinking. First off, John Nadler brings us some interesting numbers in today’s post from kitco.com.

This was a year of unsavory records, to say the least. Some 30 trillion dollars were wiped off the slate of market valuations. The year-end tally for crisis-related write-offs came in at $720 billion. The average US home fell nearly 20%.

And then, to cap the list of such dubious records, there was Bernie “Made-off” who may go down in the books as the biggest swindler in history. The list of failures or near-failures includes the very pillars of the financial Parthenon: Bear, Lehman, Merrill, Goldman, Morgan Stanley, WaMu, Citi, AIG, GM, Chrysler, UBS, and then some. The list is too long to recall them all. Other spectacular failures include commodities such as crude oil (down 64%) and copper (down 56%). Add China’s Shanghai Composite (off 65%) the S&P (lost 39%) and the Nikkei 225 (fell 42%), and record drops in the Aussie, New Zealand, and Canadian dollar versus the greenback and you are starting to get a fairly good picture of what the past twelve months have wrought.

Those numbers and names put 2008 in perspective. John continues with some numbers for gold.

Against this bleak background, we superimpose gold. While eking out a near- 3.00% gain after eight continuous years of far better showings may not make it into gold’s own record books, the metal did that which we had theorized about for some time now; preserve capital by becoming a reverse hedge and falling less than other assets. Should the deflationary maelstrom intensify in the coming year, gold will not remain immune from price declines. Our hope is that it repeats this year’s trend of becoming a reverse hedge. Any combination that includes the word “hedge” when it comes to describing gold is just fine by us.

That said, herewith the projections for gold prices in 2009. The trading range will likely remain as wide as this year’s $350 while volatility will remain an integral part of daily, weekly, and monthly swings. Prices might touch $630 on the low side and $980 on the high side – however, factor in some imponderables (severe deflation and/or catastrophic geopolitical developments) and one could augment either end of the scale by $100. Barring the latter, the average gold price will likely register near $810 per ounce, following its $871 average for the current year.

I certainly agree that $630 per ounce is a definite possibility on the next down leg, but I am sticking with my prediction of $1000 per ounce for the minimum upside by the end of 2009. Outside triggers will be the key to prices in 2009. I like the sound of Laurence Roulston’s comments made in yesterday’s post.

At this time, all we can do is look forward and find ways to make the best of the situation. For anybody with some cash, this could the best investment opportunity in years.

It could be some time yet before there is a full economic recovery. However, long before the recovery is well recognized, commodity prices will have rebounded and the prices of many of the better companies in the sector will be at levels substantially higher than the grossly oversold levels at present.

I would like to highlight gold, because I believe that gold will be the first commodity to rebound.

My sentiments exactly. Gold is so easily swayed between exuberance and despair that it’s volatility knows no bounds. That is one of the primary reasons that I urge that you should have an exit price for both the ups and downs on gold trades. It is better to take a small loss and pick up more shares later than to ride out a prolonged downturn. On the upside, when you bank a profit, it is in your pocket and there is usually another bargain just around the corner if you do your research. If you take a 25% to 35% profit don’t beat yourself up if it tops out at a 50% profit. If you feel that strongly about a stock sell only a portion of it on the upside so that you still retain some “blue sky” potential.

Roger Wiegand has some dire predictions in his post of Dec. 22nd.

During the spring of next year we see:

(1) A second larger wave of residential housing mortgage failures; (2) The first big wave of auto loan failures and repossessions; (3) Over $40 billion in credit card defaults, smashing the bank lenders; (4) The first wave of commercial mortgage failures and foreclosures on shopping malls, office buildings and other commercials; (5) And finally, the grand smashing finale of CDS Credit Default Swaps originated with No margin money or down payments! We heard today the total is 500 trillion! I cannot even fathom that number. These five converging train wrecks could take the Dow from a dead cat bounce of 10400-10800 back to 7250, or even 6600, or 5600.

Looks like 5 more triggers that will definitely send gold soaring. Let’s all hope that none of these predictions come true because if they do we are looking at a world that none of us will like! If we are lucky and only one occurs we may be able to slip through it with out a total collapse of the US monetary system. One more comment from Roger on unemployment.

Unemployment nationally in the USA is now touching 16%. The officially posted number is somewhere near half of that. By the fall of 2009, American REAL UNEMPLOYMENT WILL BE NEAR THE ALL TIME 1930′S DEPRESSION HIGH OF 25% UNEMPLOYED. SADLY, THAT IS NOT THE WORST AS IT GETS MORE DIRE. WE PREDICT REAL, USA UNEMPLOYMENT REACHES 30-40%. IN THE RUST BELT STATES OF MICHIGAN AND OHIO, WHILE 40% IS NOT UNREALISTIC.

That’s scary. This is beginning to sound more like Halloween rather than New Year’s Eve. Now let’s take a peek at Howard Katz’s piece on Dec. 29 where he discusses one of my favorite topics, the increase in monetary supply.

It has risen by 16% in just half a year. To put this figure in context, the worst year for money creation since WWII was 1986, in which the money supply grew by 17% for the full year. To make matters worse, the monetary base, which is a good predictor of the future money supply, has almost doubled over the same period. Federal Reserve Credit, a predictor of the monetary base, is up by a factor of 2½ times, and Richard Fisher, the Dallas Fed chief, has given us his opinion that, when the final numbers are in for 2008, it will be a factor of 3. (SourceFederal Reserve release H.6.)

These figures will increase as the next wave of government stimulation, intervention and regulation begin to filter through the economy next year. It is clear that the dollar is being debased in order to “save the economy”. Sometimes you have to beware of what you wish for. This will certainly push gold up. Even if we enter an extreme deflationary trend, which I doubt, gold will retain value better that any other investment during that phase. When the inevitable inflation that follows the deflationary phase kicks in, the sky is the limit for the price of gold.

Just some things to ponder as we speed toward 2009. I hope we all have peaceful and prosperous New Year.

HAPPY NEW YEAR! As always good luck and good trading!